Buying chocolatier Hershey looks like a nutty idea. Mondelez International, the maker of Oreo cookies and Cadbury Dairy Milk bars, may nonetheless give it a shot some eight years after a previous bid failed. Crunching the numbers leaves a bitter taste.There is strategic logic to the approach, which Bloomberg reported on Monday. Rival confectioner Mars is poised to get bigger following its agreed $36 billion acquisition, including debt, of salty-snacks seller Kellanova.Moreover, anti-obesity drugs present a long-term threat to the consumption of unhealthy food, while the high price of cocoa and other supplies is pressuring the bottom line. Hershey’s gross margin is set to tumble below 40% in 2025 from 45% last year, according to estimates gathered by LSEG, with revenue likely to grow a measly 2%.
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Cutting costs through sheer size would be one benefit. Likewise, boosting sales of Hershey’s namesake chocolate and Reese’s peanut-butter cups overseas, where Mondelez is stronger, would provide a welcome sugar boost.It’s in the finances where things get flaky. Winning over the Hershey Trust, which controls about 80% of the company’s vote and funds founder Milton Hershey’s school for low-income children, will be no small task. If it takes, say, 40% more than the recent stock price, the Hershey enterprise would be worth around $54 billion.At that price, the return on investment would be bite-size. Using the $2.3 billion of operating profit that analysts expect for Hershey in 2025, according to LSEG, and taxing it at the company’s projected 14% rate implies a return of only around 4%, Breakingviews calculates.The figure falls short of the company’s 7% cost of capital as estimated by Morningstar analysts. To break even, the theoretical $14 billion premium would require Mondelez to find more than $2 billion of annual synergies, equivalent to 18% of Hershey’s predicted revenue in 2025.When Kraft bought Cadbury in 2010, it projected cost savings that amounted to 7% of its target’s top line. If Mondelez could match that rate, it would then need to find enough candy lovers around the world keen to eat Hershey’s Kisses to generate an even larger sales uplift.Complicating matters further, if the transaction is funded entirely with borrowing, it would push debt to around 7 times the combined company’s anticipated 2025 EBITDA. Cutting down on leverage by paying with stock, however, would cede a portion of the all-important synergy value to Hershey shareholders. This hodgepodge of ingredients makes for an unsavory deal to swallow.
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Mondelez International, the maker of Ritz crackers and Oreo cookies, has made an initial approach to buy U.S. chocolatier Hershey, Bloomberg reported on Dec. 9, citing unnamed sources. Hershey shares closed up nearly 11%, at $193.65, while those of Mondelez fell more than 2% to $61.44. Since then, Hershey closed the week at $183.10, while Mondelez closed trading at $61.93.More By This Author:Walgreens Invites A Rube Goldberg Buyout Plan S&P 500 Earnings Dashboard 24Q3 – Friday, Dec. 13Russell 2000 Earnings Dashboard 24Q3 – Thursday, Dec. 12
